10 Jan Seriously, will someone stop these foreclosures?

Why does everyone talk about the foreclosure crisis in this country, but nobody is doing anything about it? Presidential candidates pay lip service to this tremendous problem, but can the average American wait until 2009 for relief? By then, close to two million more subprime loans will reset from their initial teaser rate to a much higher adjustable rate.

The best the Bush Administration can muster is an unenforceable agreement between the Fed and a few bigger banks. There are two major reasons why this agreement will not help this crisis: The banks are not allowed to comply with the agreement, and even if they did, the terms of the agreement would only provide relief for a few at-risk borrowers.

Keep in mind that the loan originator (ie. Countrywide, Wells Fargo, GMAC, etc.) probably does not actually own the loan. Rather, the originator sold the loan on Wall Street as part of a pool of loans, known as a securitized trust. That trust is a contract between the loan originator and the investors to provide a certain rate of return.

If the originator voluntarily agrees to “freeze” interest rates on a subprime loan, it is breaching its contract with the investors. The investors, who are already angry with the irresponsible underwriting by the originator, will have a perfect lawsuit. So, do not expect the loan servicers to voluntarily do anything to stem the tide of foreclosures.

What if the servicer was forced to reform the borrower’s mortgage, like forcing Spanky to down a swig of Castor Oil? It taste awful, but it’s for the best. This is precisely the effect of pending bankruptcy reform legislation, which would allow bankruptcy judges to modify existing residential mortgages to lower interest rates to affordable levels. Servicers want and need this, but the just don’t know it, yet.

In reality, passage of the pending bankruptcy reform bills will let them off of the hook. Investors cannot sue servicers if the law forces them to take lower monthly payments. The reduced payments will actually increase cash flow to servicers and investors since borrowers can actually afford the payment. After all, is it not better to be paid a slightly reduced monthly payment that to lose tens of thousands of dollars by foreclosing on a home?

But where are Representative Steve Chabot and Senator Chris Dodd? They are the authors of the House and Senate bills. Many see this bankruptcy reform legislation as “too radical.” Well, nothing else is working, and sometimes you can’t save the leg. You have to amputate.

If you want to know how bad things are right now, ask a consumer bankruptcy attorney. The swell of foreclosures has not translated into more personal reorganizations (ie. Chapter 13 Bankruptcy) because the current Bankruptcy Code cannot do enough to help individuals save their homes. Middle class Americans are forced to abandon the American Dream.

Chip Parker is the managing partner of Parker & DuFresne, P.A., where he represents Northeast Florida businesses and consumers facing bankruptcy, and homeowners facing foreclosure. His firm files more homeowners in the Mortgage Modification Mediation Program than any other law firm in Northeast Florida.
Parker is the recipient of Jacksonville Area Legal Aid's prestigious Award for Outstanding Pro Bono Service. Mr. Parker is an active member of the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.